The reason you have started your online small business is to make cash. There are many aspects of running a profitable online business. Controlling your cash flow is one of the most important. For more information on handling cash flow, please read an article on how to improve your startup cash flow.
Cash flow conjures up an image of a river of money flowing in. Hopefully, that will happen to you and your online business. But cash flow is a two-way street. The term refers to the circulation of funds that are required not just to grow the business but just to keep it running.
You have income but you also have business expenses. You need to balance them. It sounds simple but remembers that a company like FORD sold off two of its most famous brands, Land Rover and Jaguar to help them overcome their cash flow problems. So here are some tips to help you control yours.
- Remember cash flow is not profit. Profit is what is left over, after a fixed time, from running your business. Profit is money you take away from your business. The cash flow is money in the business.
- Get your payments fast! The best solution is cash and carries model where your customers pay and then you supply. But this only works in some kinds of business and even in those, regular customers will start to ask for credit. When you have to give credit, keep the terms as tight as the market will allow. Keep a careful watch on your billing, send reminders and actively follow up on overdue payments. Your customer’s intention to pay you is not bankable!
- Have a realistic business plan and budget. How do you expect your business to grow in the next year? How much do you expect your sales to increase? Balance this projected income with the increase in your costs. Include everything from paying suppliers, to increased internet bills and coffee consumption caused by your growing business making you spend more time online. Is the balance positive? If not, you have a serious problem and need to either increase your income or reduce your overheads.
- Your business may be seasonal with high and low sales periods. If so, make sure your cash flow during the high season has enough margin to cover your low season’s expenses. A 25% drop in sales does not mean a 25% drop in expenses.
- Business is a tough “Business.” Double standards do apply. You need to collect all your receivables as soon as you can. But you need to postpone paying your bills. I don’t mean delaying payments and getting a bad reputation and credit rating, but if you have a bill that is due for payment in 7 days, pay it only on the 6th day. Keep your cash with you as long as you can. Once your business is established, do to your suppliers what your customer does to you – negotiate for the best possible payment terms.
- Once your business is stable and you are sure of your cash flow, what are you going to do with the surplus? Like I said it’s not yet profitable. In the beginning, you can keep it in a drawer or in the bank. The money may be safe, but it’s lying idle. Once you are sure of your cash flow, start looking for safe short term investments for your surplus where you can quickly get hold of your money if your business needs it.